Where is support on a Point and Figure chart?
Support, a horizontal level across a Point & Figure chart where supply and demand are balanced, in a state of equilibrium. As a result, price trades in, and around, the level of support. Eventually, demand resumes dominance. Thereby, lifting the price from the support shelf.
Shown below, an illustration of support on a Point & Figure chart. Screenshot from our P&F charting tool, plotting Dow Industrials constituent Caterpillar. Note the brief break of support and subsequent reversal - perfectly normal behaviour on a support test. Best drawn with a fat marker pen as opposed to a sharpened pencil! Failed breaks are intentional, shaking out weaker hands, drawing in shorts, thereby fueling the recovery.
Supply and Demand Explained
A falling column of Os into support results from supply exceeding demand. Basically, there are more sellers in the market than buyers. In turn, oversupply causes the price to fall.
Should the price stabilize across P&F support, supply and demand are balanced. Every seller of a given stock is matched to a buyer, with ease.
A price rise from support, depicted by a climbing column of Xs on the Point & Figure chart, reflects overpowering demand. Supply is unable to satisfy demand.
The late Mike Burke of Chartcraft, pioneers of Point & Figure, summarizes the forces of supply and demand as:
The premise of Point and Figure charts is that supply and demand, and nothing else, determines the prices of a stock. And this supply and demand can most easily be seen in a P&F chart. When demand exceeds supply, the price rises and when supply exceeds demand, the price falls. A column of Xs would show that demand was exceeding supply, while a column of Os would show that supply was exceeding demand.
Identifying support on a Point and Figure chart?
Horizontal support on a Point & Figure chart is best spotted from a distance. A chart should be zoomed out to cover a greater period of time. Ideally columns of Xs and Os should span a couple of years. Our charting tool enables a chart to be magnified at a range of levels from 20% to 150%. A chart user may toggle with the magnification levels to achieve the necessary time span. For example, a level of 60% magnification fits the UnitedHealth Group chart below, emphasizing support levels of importance, as highlighted on the screenshot.
Support Qualification Criteria
To qualify as a significant level of P&F support, two tests are needed at a minimum. One test is satisfactory providing it was notable. For example, a major low, perhaps a low formed from a bad news event, an all-time low, or a psychological level, such as Dow 10,000, are all notable.
Behaviour Across Support
With support across a level established, the premise is that support will be found there again in the future. Once support is successfully tested, a price recovery potentially follows. The recovery is not always immediate. Therefore, patience is necessary around support levels. Additionally, Bear Traps across support levels are frequent. As a result, an investor should be prepared for such in their risk management.
Break of P&F support defined
Support levels do not always guarantee a recovery when visited. Support is considered broken when the price deteriorates beneath the identified shelf.
However, the market has memory! In the future, should the price later recover, support may be reinstated. This is often seen with psychological round numbers. For example, $10 or $100.
Why do Support levels break?
A loss of confidence in a stock, or market, triggers a break of support. Loss of confidence impacts the balance of supply and demand. Investors want out, increasing supply. Simultaneously, demand drops as buyers shy away. As a result, price support gives way.
Confidence hits at the stock level may include a profit warning (e.g. Facebook), disaster (e.g. BP) or scandal (e.g. Newscorp). At the macro level, confidence may be lost on a poor monthly Job's number, Government Debt downgrade (e.g. U.S. 2011) or terrorist incident (e.g. 9/11).
How do major support levels form?
Support on a Point and Figure chart typically forms by one of two means.
- Price troughs, or valleys, on the chart. A trough nadir is carved when demand begins to exceed supply, from a level that is deemed attractive. Over time, a series of troughs appear across a given price point. Thereby, forming a support level, evident to the eye, across the chart.
- Prior resistance, once broken, cements into support. In a rising market, as resistance levels are broken on the way up, the same horizontal level then takes on the role of support. A few weeks at least should be allowed for this process to cure since a resistance break can morph into a Bull Trap.
Lesser Supports Levels
Support levels may be considered fractal. In that, a weekly chart will have its own series of support levels, as would tick data intraday. Minor support levels, less than end-of-day values, are of little use to the long-term investor. However, they may be of used when timing entry through the use of intraday charts. These lesser levels may stem from:
- Recent chart gaps up, or down, create levels of support since they are of value to the market.
- Price spikes down may form a temporary level of support.
- The opening price of a newly listed stock can form a support level at a later date.
- The low from a news event creates a memory point to the market and in turn, possible support.
How to trade chart support?
Firstly, when considering buying on a test of support, it is imperative that the level has significance. When confidence is high, the investor should look to go long on the first buy signal following the support test. More conservative investors may want to wait for secondary confirmation, a follow-up buy signal. Additionally, a Bear Trap or 3SR across support, instills further confidence in a sustainable move off support. Bear Traps, and their derivatives, generate volume. Longs are shaken out through stop-loss orders and shorts are wrong footed. Short-covering exacerbates the rally off support.
A confluence of levels add impetus to a rally from P&F support. For instance, rising trendline support may simultaneously cut through horizontal support. When the cross-roads coincides with a price visit from above, reversal confidence is enhanced.
Furthermore, a moving average rising through the cluster adds rally confidence. A trifecta of support, that is horizontal, trendline and moving average, all at once, is rare, and powerful.
Aiding the support identification process, was a reason for the 30-week moving average value being included in the 1970s and 1980s Chartcraft periodicals. Consequently, the 30-week moving average also appears in the table of data beneath the charts on our Point & Figure tool.
Where to position a stop-loss when trading support?
Tests of support on a Point and Figure chart are invariably volatile. As a result, a mental stop is best used to avoid being caught out by sharp downward price spikes. The mental stop-loss would be positioned one box beneath the lowest column of Os formed on the test of support. When the stop-loss box is hit, reasons for the price weakness should be considered, such as news-flow and sentiment.
Trading support conclusion
Watch to capitalize on Point & Figure buy signals in and around notable support. A Bear Trap, through support, preceding a bullish breakout, adds confidence. A support confluence enhances upside conviction even further. In depth analysis of the chart is always worthwhile. A mental stop-loss is essential - support tests are volatile events!
P&F chart support explained through case studies
Supply and demand balance shift in favor of the latter on each test of $66.
Point and Figure support
Support on a Point and Figure chart frequently forms when a historic low is revisited.